Dear Sirs:
Re: Treasury Bills - Discounts as Income
This is in reply to your letter dated June 3, 1991 wherein you requested clarification of the comments found on page 13 of the 1990 General Tax Guide which state that "If you disposed of a T-Bill before maturity, you may have to report a capital gain or loss.".
It is the Department's view that where a Treasury Bill is disposed of prior to maturity, it is possible that a taxpayer may realize a capital gain or loss on the disposition, in addition to the interest which has accrued to the date of disposition.
The following example will illustrate how such capital gain or loss will be calculated:
| Treasury Bill purchase date | June 1, 1991 |
| Cost | $49,000 |
| Date of maturity | August 30, 1991 |
| Value at maturity | $50,000 |
| Date sold | August 3, 1991 |
| Proceeds of disposition | $49,800 |
| Effective yield rate | 8.28% |
The effective yield rate is determined as $1,000/$49,000 x 365/90-8.28%.
The interest to be included in income pursuant subsection 12(4) of the Act is $700.28 (8.28% x 63/365 x $49,000).
The capital gain in the above example would be calculated as follows:
Proceeds $49,800.00Less:
Cost $49,000.00
Add: adjustment to cost base for interest income 700.28 49,700.28
Capital Gain 99.72
It is our position that the full discount on Treasury Bills represents interest and, consequently, Treasury Bills are considered to be issued for an amount equal to their "principal amount" (as defined in subsection 248(1) of the Act) with the result that the condition set out in paragraph 16(3)(a) would not be satisfied. Consequently, the provisions of subsection 16(3) of the Act would not apply to the disposition of Treasury Bills.
We trust that these comments will be of assistance.
Yours truly,
for DirectorReorganizations and Foreign DivisionRulings Directorate